Reference no: EM131619035

Question: Uncorrected Misstatements and Performance Materiality. Pat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the last three years. These misstatements are immaterial and have related to isolated matters. In this summary, parentheses imply that the misstatements would have reduced balances if they had been corrected (for example, in 2011, the misstatements would have reduced net income by $82,500, assets by $100,000, liabilities by $17,500, and equity by $82,500 if corrected). During the most recent audit, Colt concluded that expenses totaling $130,000 were recognized in January 2015 (when Manning paid them) but should have been recognized in 2014.

Required: a. How does the misstatement identified in 2014 affect net income, assets, liabilities, and equity? (Assume a 35 percent tax rate for Manning.)

b. Describe the rollover method of evaluating uncorrected misstatements. Assume that performance materiality was set at $170,000. How would Colt evaluate the materiality of the misstatement under the rollover method? What adjustments (if any) would Colt propose to Manning's financial statements?

c. Describe the iron curtain method of evaluating uncorrected misstatements. Assume that performance materiality was set at $170,000. How would Colt evaluate the materiality of the $130,000 misstatement in 2014 under the iron curtain method? What adjustments (if any) would Colt propose to Manning's financial statements?

d. If performance materiality were established at $100,000 for Manning, how would Colt evaluate the materiality of the misstatement in 2014 under the rollover method and iron curtain method?

e. Based on your response to (d), what adjustments (if any) would Colt propose to Manning's financial statements under the rollover method and the iron curtain method?